The Circle of Prosperity:  How It’s Supposed to Work

Circle of ProsperityThe Circle of Prosperity illustrates how a strong private sector economy and quality public services go hand in hand.  In good times, a healthy economy drives higher incomes and lower poverty, generating tax revenue for critical public services like education and police officers while at the same time reducing the demand for them.  This allows citizens to enjoy safe, healthy and well-educated communities at reasonable tax rates.

Maintaining the Circle of Prosperity is the most pressing challenge facing Oregon’s elected and community leaders. Click on the graph to enlarge the image.

Issue #1: Oregonians’ Personal Income Has Fallen Off the U.S. Pace

Per Capita income chartAfter peaking at 102% of the national average in 1976 —during the height of Oregon’s timber economy — Oregon’s personal income levels tumbled compared to the rest of the nation during the 1980’s.  This was a particularly hard time for Oregon as a national housing recession, foreign competition, automation, and environmental regulation took a major toll on employment in Oregon’s forest products industry. (Although the industry is a fraction of its peak size, it remains the leading producer of residential lumber in the United States.)  Click here to learn more about the decline of Oregon’s forest products industry.

During the 1990s, incomes soared in the Portland Metro area, driven by rapid growth in Washington County’s “Silicon Forest.”

Rural incomes never recovered from the devastating loss of federal timber harvests, but growth in the Metro area was enough to give the state an impressive run up until 1997.

Since 1997, Oregon personal income levels have tumbled to 91% of the U.S. average, far below the State of Washington at 106% of the U.S. average.  While the two states used to track each other on personal income, they have now taken divergent paths.   Oregon’s (and Washington’s) rural economies are still stuck in the same rut they’ve been in since the 1980s.  What’s changed is that the Portland region is performing very poorly compared to other metropolitan areas around the nation, including Seattle.  In fact, Portland Metro Area incomes lag significantly behind Denver, Minneapolis, Seattle,Austin and just about every other metropolitan area that Portland considers its peer.  The decline of Portland Metro area incomes compared to the rest of the nation has been well documented in a recent report by Oregon’s leading business associations.  The report can be found at

Click on the graph to enlarge the image

Issue #2: Declining Personal Income Means Fewer Services for Oregonians

Declining Incomes Leads to Below Average Spending on Government ServicesBecause personal income in Oregon has declined to ninety-one percent of the national average, the amount of tax revenue that the government generates from the incomes of Oregonians has also declined.  This tax revenue pays for schools, police officers, care for seniors and other vital service.  Because our incomes are lower, Oregon state and local governments have a harder time paying for these services.

The adjacent graph compares state and local revenue per capita in Oregon with Washington and the national average.

Click on the graph to enlarge the image.

Issue # 3: Oregonians Have Selected a “Price of Government”

Constant Share of Income on Public ServicesOregon can’t simply tax its way out of its budget problems.  Because our incomes are low and our costs for health care, prisons and pensions are growing so rapidly, tax increases alone are not the answer.  In 2010 Oregon voters raised taxes for high-income earners and businesses, but it barely made a dent in Oregon’s budget problems.  Also, Oregonians have decided that they don’t want to pay more in taxes and fees.  For the past thirty years, Oregonians have devoted a constant share of  total personal income (16%) to the government for public services.  When taxes or fees go up in one area, they come down in another.  In essence, Oregonians, consciously or not, have selected a “price of government” and they don’t veer from it.  That means that if we want more money for schools, cops and other services we care about, we need to generate more income.  Raising taxes won’t cut it.

Explanation of graph:  This graph shows how much of the total personal income earned by all Oregonians goes to fund state and local government.   The top line shows that Oregonians contribute about 16% of total personal income to state and local government in the form of taxes and fees.  The middle line shows that just under 10% of total personal income pays for state and local taxes (no fees).  The bottom line shows just the state General Fund.  The General Fund is funded by state income taxes and lottery proceeds and is commonly referred to as the “state budget.”  Ninety percent of the General Fund pays for just three core services:  public education, public safety and health/human services.  Oregonians contribute 5% of total personal income to the General Fund.  Note that over the thirty year period covered by the graph many changes to the tax and revenue system were made, including the property tax limitations of Measure 5, 47 and 50, many local bonds and levies, and the introduction of video lottery (the state splits video lottery proceeds with the tavern owners who host the machines).  However the percent of total personal income that goes to the government has remained roughly the same.  This phenomenon is known as “The Price of Government.”

Issue #4: If Some Costs Rise Faster than Personal Income, Others Must Decline

Crowding out of educationOver ninety percent of the state General Fund goes to three areas: education, public safety and health/human services. To put it bluntly, Oregon income taxes pay to educate, medicate and incarcerate Oregonians.

We already know that Oregon has fewer dollars than other states to pay for these public services.  But the cost of some services is rising much more rapidly than others.  In Oregon, we are spending more and more of our public dollars on health/human services (specifically Medicaid – health care for children, the poor, and the disabled) and public safety (specifically prisons), while shrinking our investments in education.

As this other chart shows, between 2000-2011 the growth in spending on human services averaged 5.9% annually, public safety 4.8% annually, K-12 education 2.9% annually, and higher education/community colleges about 1% annually, despite significant growth in higher education enrollment (adjusted for enrollment, per student higher education spending declined significantly).  Because educational attainment is closely tied to income levels, this squeezing out of education will likely lead to further erosion of personal incomes in Oregon.

Issue #5: The Trends Worsen Over the Next Decade

Next Decade is Even WorseThe costs for Medicaid will continue to rise rapidly over the next decade.

A poorly designed pension system and the 2008 stock market crash combined to present another challenge for the coming years: a significant burden on taxpayers to cover commitments to public employee retirement accounts.

Together, these two expenses will
eat up an additional 1.1% of total personal income in Oregon by 2018 (for a total of 2.3%).  Remember, for the past 30 years the entire state general fund has equaled 5% of total personal income.  These escalating costs have to be paid for by something.  In Oregon, if we follow recent trends, we will pay for these growing costs by investing less in education, and particularly higher education.  This could have the devastating effect of further driving down personal income levels, because education, employment and income levels are closely tied.

Prime Working Age Adults Per Aged OregonianOne reason for the growth of Medicaid costs is the aging population.  Over the coming years, there will be far fewer working-age adults to help pay for the services that the elderly population requires.  To make matters worse, the baby boomer population leaving the workforce is significantly better educated than the incoming  25-34 year workforce.  This is the first time in recent history that the incoming workforce is less educated than the outgoing workforce.

We also face significant demographic challenges with our population of kids entering school.  One out of every five kids under the age of five lives in poverty, and one out of four have no English speaking parent.

Issue #6: Job Losses Are Severe and Economists Predict a Slow Recovery

Change in Employment and Time To Recovery SmallThe impact of the Great Recession is the deepest Oregon has seen since the Great Depression, exacerbating the trends described above.

The recovery has been long and slow recovery.  This downturn will require action and leadership from across the private and public sector.

The adjacent graph depicts the changes in Oregon’s employment trends for the last 4 recessions. Click to enlarge the image.

Issue #7: Oregon’s Tax System Remains Unstable and Unbalanced

Taxes as a share of personal incomeOregon’s overall tax burden is below the national average when expressed as a share of personal income, and Oregon relies more on income taxes than any other state.

Income and capital gains taxes are the most volatile of all taxes and they discourage high wage earners from locating and investing in Oregon.

Oregon has an inadequate rainy day fund to balance against the volatility of our tax system.  To improve stability of revenues for public services and incentives for economic growth, Oregon needs to reduce its high income/capital gains taxes, introduce sales or other consumption based taxes, and expand the size of its rainy day fund and commit to a permanent mechanism for filling it, such as the income tax kicker.

Two Possible Possible Paths Moving Forward

As illustrated in the two columns below, maintaining a Circle of Prosperity requires a different attitude and approach from the debates of the past and old ways of thinking.

Replay the Debate of the 2000s  Refocus the Debate
  • Taxes are inadequate.  Businesses and wealthy Oregonians pay too little.
  • Public employees are overcompensated, overprotected and underproductive.
  • Focus on high wage job creation as the best source of revenue for families and public services.
  • Redesign the way we budget for and deliver state services to get better value for the limited dollars we have.
  • Revamp the tax system to provide adequate and stable revenues and better incentives for economic growth.

The path we favor involves the following steps:

Step #1: Grow Jobs and Incomes

If Oregon were just average in terms of employment personal income levels, each of us would have thousands more in our pockets and the state would have billions more for schools.  How do we create jobs and income?

  • Agree that it is important in good times and bad. 
  • Develop and advance specific initiatives to improve the business climate and create jobs, from investing in worker training to making industrial land available to simplifying permitting processes.

Step #2: Redesign The Way We Budget For and Deliver State Services

New Budgets Will Transform the Policy DiscussionBecause of the trends we are facing and the slow economic recovery, state and local governments are going to have less revenue to meet growing demands.  That means we need to come up with better, more efficient ways of meeting our objectives and using the budgeting process to drive the change.  Unfortunately, this is not how Oregon’s budgeting process works. The current process asks the wrong questions. Rather than asking how to meet desired objectives with the revenues available, it funds existing programs, and tweaks them at the margins based on how much revenue is available.  If we just keep doing things the same way we always have, adding or taking away dollars at the margins, we’ll never figure out how to meet our public policy goals.  Used properly, the budget is a tool that inspires innovation and forces us to develop better ways of doing things.   At its worst, it perpetuates failure.

Under Governor Kitzhaber Oregon initiated a new budgeting process that starts with the revenues available, focuses on outcomes, and looks out ten years instead of two. This approach needs to be maintained. Learn more about it here.

Step #3:  Instead of Tweaking the Tax System, Give it a Complete Overhaul

Taxes as a share of personal incomeOregonians should work toward consensus on broad tax overhaul including the introduction of sales taxes to offset needed reductions in income and capital gains taxes.  In the meantime, there are things we can do right away to make the system better for high wage job growth, the most important is to  build a robust rainy day fund, looking at all possible funding sources including the kicker.

Review and Comment on Our Initiatives

For more detailed information about our ideas to create jobs and revamp Oregon’s system of public finance and budgeting, review and comment on our Initiatives.  While we have identified major areas of opportunity, we are seeking input on what actions Oregon can and should take in the near term to make progress.